Reading a price chart

A picture of the price

A price chart puts time along the bottom and price up the side. Each point on it answers one question: what was the price then? Read from left to right, it tells the story of how a share’s price moved.

There are two kinds of chart you will see most often.

A line chart joins one price for each period — usually the closing price — with a line. It is the simplest picture: up means the price rose, down means it fell. It is good for seeing the general direction over months or years.

A candlestick chart draws one shape for each period, called a candle. Each candle shows four prices instead of one, so you can see not only where the price ended but how far it travelled on the way.

The four prices in a candle

For every period, a candle shows:

• Open — the first trade price of the period.
• High — the highest price anyone paid during the period.
• Low — the lowest price.
• Close — the last trade price of the period.

The thick part of the candle, the body, runs from the open to the close. The thin lines above and below it, the wicks, reach up to the high and down to the low.

The colour tells you which way the period went. In most charting apps:

• Green — the close is higher than the open. The price rose during the period.
• Red — the close is lower than the open. The price fell during the period.

Volume: how much trading stood behind it

Under most charts is a row of bars: the volume. Each bar shows how many shares changed hands in that period — for example, 2 million shares on a given day.

Volume tells you how much activity stood behind a move. A price that jumps on very heavy volume means many buyers and sellers took part. A move on very light volume involved few people and can reverse more easily. Volume often rises on days with news — a quarterly report, a big announcement.

Time frames

Every candle covers the same length of time, and you choose that length with the time frame. On a daily chart, each candle is one trading day. On a weekly chart, each candle is one week: its open is Monday’s first price, its close is Friday’s last, and its high and low are the week’s extremes. On a one-day view, each candle may cover just a few minutes.

The same share can look very different in different time frames. A sharp fall over one afternoon may be a small dip on a one-year chart. Before reading anything into a chart, check which time frame you are looking at, and how far back it goes.

What a chart can tell you

A chart is a good record of the past. It shows:

• where the price has been, and how far it has risen or fallen over a period;
• how much the price usually swings — its volatility;
• on which days something happened, by the size of the candles and the volume.

Placed next to the news or a company’s reports, a chart helps you see how the market reacted to each event.

What a chart cannot tell you

A chart cannot tell you what the price will do next. People give names to shapes on charts — “support”, “resistance”, “head and shoulders” — and some believe these shapes repeat. Sometimes the price behaves as the pattern suggests; often it does not. A pattern is a description of the past, not a promise about the future.

A chart also says nothing about what the company is worth. A share that has doubled may still be cheap compared with what the company earns, or very expensive. For that, you need the company’s reports — the subject of the next lesson.

In short

A line chart joins closing prices; a candlestick shows the open, high, low and close of each period, green when the period closed higher and red when lower. Volume shows how much trading stood behind a move, and the time frame sets what each candle covers. A chart is a record of what happened — never a forecast.